Shi R2 Solutions, Inc., D/B/A Deimco Finishing Equipment v. Pella Corporation ( 2015 )

IN THE COURT OF APPEALS OF IOWA
No. 13-0259
Filed April 8, 2015
SHI R2 SOLUTIONS, INC., d/b/a DEIMCO FINISHING EQUIPMENT,
Plaintiff-Appellant,
vs.
PELLA CORPORATION,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Tama County, Marsha M. Beckelman,
Judge.
A plaintiff company appeals a district court’s grant of summary judgment on all
claims to the defendant. REVERSED AND REMANDED.
Darrell G. Meyer, Marshalltown, for appellant.
Sharon Soorholtz Greer of Cartwright, Druker & Ryden, Marshalltown, and Terri
L. Combs and Jesse Linebaugh of Faegre, Baker & Daniels, L.L.P., Des Moines, and
Randall E. Kahnke and Peter C. Magnuson of Faegre, Baker & Daniels, L.L.P.,
Minneapolis, Minnesota, and Christopher J.L. Diedrich of Faegre, Baker & Daniels,
L.L.P., Denver, Colorado,for appellee.
Heard by Vaitheswaran, P.J., and Tabor and Mullins, JJ.
2
VAITHESWARAN, P.J.
A company that sued Pella Corporation for misappropriation of trade secrets and
breach of contract appeals the district court’s grant of summary judgment in favor of
Pella.
I. Background Facts and Proceedings
SHI R2 Solutions, Inc. (Deimco) designs and manufactures custom finishing
equipment. Pella Corporation manufactures windows and doors. Deimco agreed to
build custom equipment for Pella. Deimco’s president, Kirk Shirar, signed a
confidentiality agreement prohibiting the disclosure of Pella’s confidential and
proprietary information. Pella was not asked to sign a similar agreement prohibiting the
disclosure of Deimco’s confidential and proprietary information.
In 2004, Pella asked Deimco for a quotation to manufacture an industrial finishing
machine with conveyers and ovens. The quotation request form stated, “[a]ny
modifications to standard machine configurations shall be the design responsibility of
and remain in ownership of the Vendor.” The “vendor” was Deimco.
Deimco prepared a quotation and provided Pella with a drawing depicting the
equipment, known as an “approval drawing.” Deimco’s engineering manager testified
the drawing was “an overall system drawing that shows the various views of what we
are proposing to sell to the customer.” The drawing included the following legend: “This
drawing contains proprietary information of SHI R2 Solutions, Inc. [Deimco].
Possession thereof does not confer any right to reproduce, use or disclose in whole or
in part any such information without written authorization from SHI R2, Inc. [Deimco].”
The drawing required the purchaser’s endorsement which, according to the engineering
3
manager, was an acknowledgment the purchaser understood what Deimco intended to
build. Dan Bartlett, Pella’s project manager at the time, endorsed the drawing. Deimco
built the equipment and delivered it to Pella.
Pella and Deimco continued to do business with each other. During the
negotiations for another project, Pella tried to change the ownership language contained
in its original request for quotation. Pella replaced the language with, “The original
machine design and drawings of custom machine will become property of Pella
Corporation.” Deimco objected and inserted the following language in its quotation,
“The machines designs, sub-assembly, and fabrication drawings are the intellectual
property of Deimco finishing equipment.” Pella acquiesced in this language by
indicating its purchase order was pursuant to Deimco’s quotation.
Three years after Deimco and Pella began their business relationship, Pella
elected to design and produce its own finishing equipment. Under the auspices of
maintaining the Deimco machines in its possession, an engineer assigned to the project
asked Deimco to turn over sub-assembly drawings of the spray guns inside the
machines. Deimco declined the request. In time, Pella disassembled and replicated a
Deimco machine, notwithstanding concern among some within the company as to
whether the cited proprietary language allowed it to do so.
When Pella informed Deimco the company would not be hired for an upcoming
project, Deimco began to suspect Pella was reverse engineering its machines.1 Deimco
1
A machine designer at Pella testified “reverse engineering” is the process of “measur[ing]
something, to see how something functions” and using the measurements as a basis for
deriving a design. See Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 775 n.8
(Iowa 1999) (“‘Reverse engineering is the process by which a completed process is
systematically broken down into its component parts to discover the properties of the product
4
filed suit alleging common law and statutory claims of misappropriation of trade secrets
and breach of Pella’s contractual obligation not to infringe on its intellectual property.2
Pella moved for summary judgment. The district court granted the motion and
this appeal followed.
II. Analysis
Summary judgment is proper only if “the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law.” Iowa R. Civ. P. 1.981(3). A question of fact exists “if
reasonable minds can differ on how the issue should be resolved.” Walker v. Gribble,
689 N.W.2d 104, 108 (Iowa 2004). We view the record in the “light most favorable to
the party opposing the motion for summary judgment.” Kelly v. Iowa Mut. Ins. Co., 620
N.W.2d 637, 641 (Iowa 2000). These summary judgment standards dictate the
outcome of the appeal.
A. Misappropriation of Trade Secrets Claim
As noted, Deimco raised common law and statutory misappropriation of trade
secrets claims. Deimco does not argue its common law claim differs in substance from
its statutory claim.3 Accordingly, we will focus on its statutory claim. To the extent the
with the goal of gaining the expertise to reproduce the product.’”) (quoting Christianson v. Colt
Indus. Operating Corp., 870 F.2d 1292, 1295 n.4 (7th Cir. 1989)).
2
Other claims were dismissed before the court’s ruling on the motion for summary judgment.
3
The Iowa Supreme Court set forth the elements of a common law trade secrets claim as
follows: “(1) existence of a trade secret, (2) acquisition of the secret as a result of a confidential
relationship, and (3) unauthorized use of the secret.” Basic Chems., Inc. v. Benson, 251
N.W.2d 220, 226 (Iowa 1977); see also Kendall/Hunt Publ’g Co. v. Rowe, 424 N.W.2d 235, 245-
46 (Iowa 1988). A federal court applying Iowa law stated “[t]he elements of a claim of
misappropriation of trade secret under the Iowa Uniform Trade Secrets Act and Iowa common
5
parties import common law trade secret principles, we find it unnecessary to apply those
principles because the statute is plain and unambiguous. See 205 Corp. v. Brandow,
517 N.W.2d 548, 550 (Iowa 1994) (“It is suggested that the common-law understanding
of trade secrets should guide our interpretation of section 550.3(a). We think not; the
words of the statute are plain and unambiguous.”). But see Cemen Tech, Inc. v. Three
D Indus., L.L.C., 753 N.W.2d 1, 7 (Iowa 2008) (considering common law factors in
determining if information is a trade secret). Because Iowa’s statute is based on a
uniform act, we may “look to the comments and statements of purpose contained in
Uniform Acts to guide our interpretation of a comparable provision in an Iowa Act” in the
absence of “instructive Iowa legislative history.” Office of Citizens’ Aide/Ombudsman v.
Edwards, 825 N.W.2d 8, 15 n.2 (Iowa 2012).
Iowa’s Trade Secrets Act, Iowa Code chapter 550, allows the owner of a trade
secret to obtain damages for misappropriation of a trade secret. Iowa Code § 550.4(1)
(2013). Iowa Code section 550.2(4) defines “trade secret” as:
information, including but not limited to a formula, pattern, compilation,
program, device, method, technique, or process that is both of the
following:
a. Derives independent economic value, actual or potential,
from not being generally known to, and not being readily
ascertainable by proper means by a person able to obtain
economic value from its disclosure or use.
b. Is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.[4]
law are practically indistinguishable.” Titan Int’l, Inc. v. Bridgestone Firestone North Am. Tire,
LLC, 752 F. Supp. 2d 1032, 1039-40 (S.D. Iowa 2010).
4
Iowa Code section 550.2(4) was amended to require satisfaction of “both” requirements rather
than “either” requirement. See Uncle B’s Bakery, Inc. v. O’Rourke, 920 F. Supp. 1405, 1425
n.11 (N.D. Iowa 1996) (citing 1991 Iowa Acts ch. 35, § 1 and Brown v. Iowa Legislative Council,
490 N.W.2d 551, 554 n.2 (Iowa 1992)).
6
The parties do not seriously dispute that Deimco’s designs for the Pella machines
constituted “information” within the meaning of the trade secret definition. They focus
on other aspects of their relationship and commercial dealings, which largely implicate
the extent to which Deimco made reasonable efforts to maintain the secrecy of the
information. See Iowa Code § 550.2(4)(b). On this question, the district court found it
“undisputed that Deimco publicly disclosed its equipment through public sales and
without confidentiality agreements or patent protection in place, and thus did not take
reasonable steps to maintain the secrecy of the device.”
Whether Deimco used “reasonable efforts” to maintain the secrecy of its
information is an issue of fact normally left to the fact-finder. 205 Corp., 517 N.W.2d at
551; see also Olson v. Nieman’s, Ltd., 579 N.W.2d 299, 314 (Iowa 1998). This issue of
fact was disputed. Deimco essentially concedes it failed to have Pella execute a formal
confidentiality agreement and failed to obtain patent protection for the Pella machines.
But, Deimco proffered affidavits, deposition testimony, documents, and expert opinions
controverting each of the grounds on which Pella relied to support its assertion that this
element of the trade secret definition was not satisfied.
We begin with Pella’s reliance on Deimco’s display of machines at trade shows.
Deimco responded the displayed equipment materially differed from the products sold to
Pella. While a Deimco engineering manager acknowledged examining competitors’
machines at trade shows and on websites “to see if it’s got an advantage over ours,” he
also stated he “never learned anything specific about how they accomplish that.”
Pella also cites tours of Deimco’s facility given to Pella employees where,
according to Pella, the employees “carefully studied Deimco’s equipment and performed
7
testing with no express confidentiality restriction in place.” Deimco countered only non-
confidential information was disclosed to Pella employees during the tour. It supported
this assertion with an expert opinion stating “Deimco’s trade secrets could not have
been established based upon viewing the laboratory testing conducted at Deimco in
November of 2005.” See EFCO Corp. v. Symons Corp., 219 F.3d 734, 741 (8th Cir.
2000) (noting company “screened tour candidates to ensure that none of its secret
information would be at risk” and produced testimony that “none of its trade secrets
would be ascertainable to the naked eye by looking at its products because its
manufacturing process cloaked the secrets.”); cf. Electro-Craft Corp. v. Controlled
Motion, Inc., 332 N.W.2d 890, 903 (Minn. 1983) (noting memo warning managerial
employees to restrict unannounced laboratory tours to protect secrets was never
enforced).
Pella next points to drawings posted to Deimco’s website. Deimco’s president
disagreed that anything confidential could be gleaned from them. In his view, the
drawings simply gave “an overall view of” Deimco’s equipment. Two Deimco experts
seconded this view. One of the experts opined that the website contained insufficient
information “to reverse engineer the trade secrets manifested in the design of the
machine itself.” He continued, “[O]ne of ordinary skill in the art could not take the little
information available from the website and build the machine.”
This brings us to the machines themselves. In Pella’s view, “[a]fter buying the
equipment every customer had full opportunity to study (and to permit others to study)
the ‘inner workings’ of the Deimco equipment. That is ‘unrestricted public consumption,’
and Deimco did nothing to protect against it.” In our view, the “reverse engineering
8
argument” goes more to the first prong of the trade secret definition—whether the
information was “readily ascertainable.” See Iowa Code § 550.2(4)(a); Walker Mfg., Inc.
v. Hoffmann, Inc., 261 F. Supp. 2d 1054 (N.D. Iowa 2003); Thomas W. Foley, Keeping
a Company’s Confidences Secret: Trade Secret Enforcement Under Iowa’s Uniform
Trade Secrets Act, 59 Drake L. Rev. 1, 11-13 (2010). However, we will address it here.
The district court cited the deposition testimony of Deimco’s engineering
manager indicating the design details were fairly basic and could be gleaned in a short
amount of time.5 But this evidence was disputed. Deimco pointed to Pella’s own
documentation, which revealed it would take 2315 hours to design and build a paint
curing oven like the purchased one. See Cemen Tech, 753 N.W.2d at 9 (“[I]f acquisition
of the information through an examination of a competitor’s product would be difficult,
costly, or time-consuming, the trade secret owner retains protection against an improper
acquisition. . . .”) (citing Restatement § 39 cmt. f). Additionally, one of Deimco’s experts
opined Pella used improper means to reverse engineer the machine.
We are left with Deimco’s failure to obtain a confidentiality agreement from Pella.
Pella asserts “the lack of a confidentiality agreement . . . means that Deimco did not
take reasonable efforts to maintain secrecy.” Pella relies on section 41 of the
Restatement (Third) of Unfair Competition (1995), which states:
A person to whom a trade secret has been disclosed owes a duty of
confidence to the owner of the trade secret for purposes of the rule stated
in § 40 if:
(a) the person made an express promise of confidentiality prior to
the disclosure of the trade secret; or
(b) the trade secret was disclosed to the person under
circumstances in which the relationship between the parties to the
5
The district court noted that this witness attempted to change his testimony via a subsequent
affidavit. The court declined to consider his efforts to create a “sham issue of fact.” In finding a
genuine issue of fact on this issue, we have not considered this affidavit.
9
disclosure or the other facts surrounding the disclosure justify the
conclusions that, at the time of the disclosure,
(1) the person knew or had reason to know that the
disclosure was intended to be in confidence, and
(2) the other party to the disclosure was reasonable in
inferring that the person consented to an obligation of
confidentiality.
(Emphasis added.) Section 40, in turn, relates to the appropriation of trade secrets.
These sections are inapposite because the preliminary and dispositive issue in this case
is the definition of a trade secret rather than the appropriation or misappropriation of a
trade secret. See Electro-Craft, 332 N.W.2d at 903 (stating “[s]ince no trade secrets
existed to be misappropriated, we technically need not reach the issue of whether
misappropriation occurred”; but proceeding to address the “interrelated” issue). Iowa’s
definition of trade secret makes no reference to “an express promise of confidentiality.”
Iowa Code § 550.2(4). For that matter, neither does Iowa’s definition of
“misappropriation.” See id. § 550.2(3). The Iowa definitions track the definitions in the
Uniform Trade Secrets Act, which, contrary to Pella’s assertion, do not preclude a trade
secret claim for the “sale of a product without an explicit confidentiality agreement in
place.” See Unif. Trade Secrets Act § 1, 14 U.L.A. 437 (1985). Indeed, in construing
our definition, the Iowa Supreme Court has declined to hold the absence of a
confidentiality agreement dispositive on the question of whether information constitutes
a trade secret. See Cemen Tech, 753 N.W.2d at 7-8 (stating a confidentiality
agreement “‘can be an important although not necessarily conclusive factor in
determining whether the information qualifies for protection as a trade secret’”) (quoting
Restatement (Third) of Unfair Competition § 39 cmt. d)). And, the court has interpreted
section 550.2(4)(b) to place emphasis on the “reasonableness” requirement. See 205
10
Corp., 517 N.W.2d at 551 (“The key to this second element of the trade secret test is
found in the words ‘reasonable under the circumstances.’”); see also Olson, 579 N.W.2d
at 314 (concluding use of word “inventor” on a drawing generated a jury question on
reasonable-efforts-to-preserve-secrecy requirement).
As noted, Pella itself included language in its first request for quotation stating
the information belonged to Deimco. Pella attempted to alter the language at a later
date, but Deimco objected and inserted language in its quotation emphasizing the
proprietary nature of the information. Pella proceeded with the purchase, subject to the
added language. Additionally, Pella endorsed the approval drawings, which also
contained legends stating the machine designs were proprietary. Cf. Fail-Safe, LLC v.
A.O. Smith Corp., 674 F.3d 889, 893-94 (7th Cir. 2012) (“None of the information
provided by FS to AOS was marked confidential, nor did FS make it known that it
expected this information to remain confidential. . . . Nor did FS take any steps to
protect its claimed proprietary information, contractually or otherwise.”); Electro-Craft,
332 N.W.2d at 903 (finding reasonable efforts to protect secrecy were not made where
none of the technical documents were marked “confidential” and “drawings, dimensions
and parts were sent to customers and vendors without special marking”).
In internal e-mails, Pella acknowledged the quotation language and legends
raised concerns about Pella’s decision to reverse engineer the machine. Former Pella
employee Dan Bartlett attested “[t]he language of Pella’s RFQ and Deimco’s Approval
Drawing make it clear that Pella was prohibited from reverse engineering the Deimco-
built equipment and also [was] prohibited from using Deimco’s drawings without prior
written authorization.” Deimco’s experts seconded this view, opining the language
11
revealed an intent to maintain the confidentiality of the design and manufacturing
process. Finally, when Pella sought sub-assembly drawings, putatively for maintenance
purposes, Deimco refused to turn them over.
We conclude Deimco generated a genuine issue of material fact on whether its
efforts to maintain the secrecy of its information were reasonable under the
circumstances. See Wyeth v. Natural Biologics, Inc., 395 F.3d 897, 900 (8th Cir. 2005)
(stating “[a]bsolute secrecy is not required”).6
In reaching this conclusion, we acknowledge the existence of adverse authority.
See, e.g., BDT Products, Inc. v. Lexmark Int’l, Inc., 274 F. Supp. 2d 880, 890-93 (E.D.
Ky. 2003); In re Dippin’ Dots Patent Litig., 249 F. Supp. 2d 1346, 1375-76 (N.D. Ga.
2003); Contacts Materials Processing, Inc. v. Kataleuna GmbH Catalysts, 164 F. Supp.
2d 520, 534 (D. Md. 2001). But the Iowa Supreme Court appears to have charted a
more fact-intensive course. See EFCO, 219 F.3d at 741 (noting “Iowa’s broad definition
of trade secrets, together with its liberal construction by Iowa courts”); Interbake Foods,
L.L.C. v. Tomasiello, 461 F. Supp. 2d 943, 966-68 (N.D. Iowa 2006) (finding significant
deficiencies in efforts to maintain secrecy but concluding under Iowa law efforts were
reasonable); S&W Agency, Inc. v. Foremost Ins. Co., 51 F. Supp. 2d 959, 979 (N.D.
Iowa 1998) (noting jury “reasonably could have determined [. . .] that plaintiffs kept the
information secret to an extent that was reasonable under the circumstances”). On this
6
Pella suggests there was no duty of confidence owing to Deimco and we could affirm as a
matter of law on this basis. The question of duty bears on the misappropriation element. See
Iowa Code § 550.2(3)(d) (“Disclosure or use of a trade secret by a person who at the time of
disclosure or use knows that the trade secret is acquired under circumstances giving rise to a
duty to maintain its secrecy or limit its use.”). We believe this element raises a mixed question
of law and fact. The facts relating to this issue are disputed. Because there is a genuine issue
of material fact, we are unable to affirm the summary judgment ruling on the ground there was
no duty of confidence as a matter of law.
12
summary judgment record, we are unable to find the “reasonable efforts to maintain
secrecy” requirement satisfied as a matter of law.
We briefly turn to the first prong and the “reasonably ascertainable” requirement.7
The district court found the information readily ascertainable based on the availability of
the information at trade shows, tours of the Deimco facility, and Deimco’s postings on
the internet, all addressed above. Additionally, the court relied on the ability to reverse
engineer a machine, a topic we also addressed above. As with the “reasonable efforts
to maintain secrecy” prong, we conclude Deimco generated an issue of material fact on
the “reasonably ascertainable” requirement precluding summary judgment in favor of
Pella. Accordingly, we reverse the grant of summary judgment to Pella on Deimco’s
common-law and statutory misappropriation-of-trade-secrets claims.
B. Breach of Contract Claim
Deimco next challenges the district court’s ruling on its breach-of-contract claim.
It contends the legend in the approval drawings and the proprietary language in its
quotations “imposed an obligation on Pella to refrain from using Deimco’s designs, and
Pella’s development of its own equipment” and the district court erred in concluding
otherwise.
As noted at the outset, the legend on each approval drawing read: “This drawing
contains proprietary information of SHI R2 Solutions, Inc. [Deimco]. Possession thereof
does not confer any right to reproduce, use or disclose in whole or in part any such
information without written authorization from SHI R2, Inc. [Deimco].” The pertinent
portion of the Deimco quotations read: “The machine’s designs, sub-assembly, and
fabrication drawings are the intellectual property of Deimco Finishing Equipment.”
7
The “economic value” element of the first prong was not contested.
13
Pella contends the language in the quotation “never became part of a contract
between the parties as a matter of law” and, in any event, neither this language nor the
legend on the approval drawings prohibited reverse engineering.
To prevail on its breach-of-contract claim, Deimco must prove the following
elements: (1) the existence of a contract, (2) the terms and conditions of the contract,
(3) performance of all the terms and conditions required under the contract (or excuse
from such performance), (4) the defendant’s breach of the contract in some particular
way, and (5) damage as a result of the breach. Royal Indem. Co. v. Factory Mut. Ins.
Co., 786 N.W.2d 839, 846 (Iowa 2010). We conclude as a matter of law that Deimco
and Pella had contracts for the purchase of machines, reflected in requests for
quotations, quotations, purchase orders, and approval drawings.
The real question is whether the proprietary language obligated Pella to refrain
from replicating the Deimco machines without Deimco’s authorization. As a preliminary
matter, the parties disagree on the rules of construction to be applied. The Iowa
Supreme Court has clarified that “the meaning of a contact ‘can almost never be plain
except in a context.’” Pillsbury Co., Inc. v. Wells Dairy, Inc., 752 N.W.2d 430, 436 (Iowa
2008). Specifically, “‘[a]ny determination of meaning or ambiguity should only be made
in the light of relevant evidence of the situation and relations of the parties, the subject
matter of the transaction, preliminary negotiations and statements made therein, usages
of trade, and the course of dealing between the parties.’” Id.; see also Iowa Code
§ 554.2202 (allowing supplementation with evidence of “course of performance, course
of dealing, or usage of trade”); Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18, 23
(Iowa 2013) (noting UCC does not “entirely eliminate the common law of contracts”).
14
“When the interpretation of a contract depends on the credibility of extrinsic
evidence or on a choice among reasonable inferences that can be drawn from the
extrinsic evidence, the question of interpretation is determined by the finder of fact.”
Pillsbury, 752 N.W.2d at 436. Deimco’s exhibits and testimony cited in Subpart A,
generated a genuine issue of material fact on the question of whether the contract
language prohibited Pella from reverse engineering the machine. Accordingly, we
reverse the grant of summary judgment as to Deimco’s breach-of-contract claim.
III. Disposition
We reverse the district court’s grant of summary judgment in favor of Pella and
remand for further proceedings. We find it unnecessary to address any of the remaining
arguments raised by the parties.
REVERSED AND REMANDED.